COMBINED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION YEARS ENDED
TABLE OF CONTENTS YEARS ENDED INDEPENDENT AUDITORS' REPORT 1 COMBINED FINANCIAL STATEMENTS COMBINED STATEMENTS OF FINANCIAL POSITION COMBINED STATEMENTS OF ACTIVITIES COMBINED STATEMENTS OF CASH FLOWS COMBINED STATEMENTS OF FUNCTIONAL EXPENSES 3 4 6 7 9 SUPPLEMENTARY INFORMATION INDEPENDENT AUDITORS' REPORT ON COMBINING INFORMATION 25 COMBINING STATEMENT OF FINANCIAL POSITION 26 COMBINING STATEMENT OF ACTIVITIES 27
CliftonLarsonAllen LLP CLAconnect.com INDEPENDENT AUDITORS' REPORT Board of Directors ACH Child and Family Services and Affiliates Fort Worth, Texas Report on the Financial Statements We have audited the accompanying combined financial statements of ACH Child and Family Services and Affiliates (ACH) which comprise the combined statements of financial position as of December 31, 2016 and 2015, and the related combined statements of activities, cash flows, and functional expenses for the years then ended, and the related notes to the combined financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America, and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. (1)
Board of Directors ACH Child and Family Services and Affiliates Opinion In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of ACH Child and Family Services and Affiliates as of December 31, 2016 and 2015, and the combined changes in their net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. CliftonLarsonAllen LLP Fort Worth, Texas September 21, 2017 (2)
COMBINED STATEMENTS OF FINANCIAL POSITION ASSETS 2016 2015 Cash and Cash Equivalents $ 2,202,446 $ 2,056,209 Restricted Cash 215,082 304,550 Cash Restricted for Capital Improvements 1,170,000 20,000 Grants and Program Receivable, Net of Allowance for Doubtful Accounts of $160,212 and $100,000, respectively 7,296,855 5,054,082 Accrued Interest Receivable 52,188 52,188 Other Receivables 196,436 139,655 Due From Investment Custodian 2,950,000 - Prepaid Expenses 133,695 169,898 Promises to Give, Net 1,281,964 812,336 Investments - Publicly Traded/Listed Securities 35,731,203 35,177,892 Investments - Nonpublicly Traded 15,544,842 18,376,144 Mineral Interests and Real Estate, Net 22,387,326 22,882,006 Beneficial Interest in Trust 9,729,095 9,636,074 Note Receivable 9,070,750 9,070,750 Property and Equipment, Net 25,144,924 24,758,234 Total Assets $ 133,106,806 $ 128,510,018 LIABILITIES AND NET ASSETS LIABILITIES Accounts Payable and Accrued Liabilities $ 5,061,285 $ 5,020,760 Line of Credit 2,450,124 11,900,782 Notes Payable 13,000,000 13,000,000 Debt Issuance Costs, Unamortized Portion (7,120) (30,113) Total Liabilities 20,504,289 29,891,429 NET ASSETS Unrestricted: Undesignated 33,152,862 42,993,125 Board Designated Endowment 76,110,297 54,649,097 109,263,159 97,642,222 Temporarily Restricted 2,390,491 27,500 Permanently Restricted 948,867 948,867 Total Net Assets 112,602,517 98,618,589 Total Liabilities and Net Assets $ 133,106,806 $ 128,510,018 See accompanying Notes to Combined Financial Statements. (3)
COMBINED STATEMENTS OF ACTIVITIES YEARS ENDED 2016 Temporarily Permanently Unrestricted Restricted Restricted Total PUBLIC SUPPORT Contributions $ 653,068 $ 347,828 $ - $ 1,000,896 Capital Campaign Contributions - 4,735,000-4,735,000 Estates and Trusts 125,000 - - 125,000 Special Events, Net of Direct Costs of $72,373 and $82,216, Respectively 172,401 - - 172,401 Total Public Support 950,469 5,082,828-6,033,297 REVENUE AND INVESTMENT RETURNS Program Service Fees 47,650,946 - - 47,650,946 Government Grant Income 398,382 - - 398,382 Rental and Other Income 384,899 - - 384,899 Interest and Other Income 627,402 - - 627,402 Mineral and Real Estate Properties, Net 3,413,061 59,261-3,472,322 Investment Income, Net 558,983 9,706-568,689 Realized and Unrealized Gains(Losses) on Investments, Net 1,238,308 21,501-1,259,809 Realized Gain on Sale of Assets 10,486,155 - - 10,486,155 Change in Value of Beneficial Interest in Trust Assets 501,149 - - 501,149 Total Revenues and Investment Returns 65,259,285 90,468-65,349,753 NET ASSETS RELEASED FROM RESTRICTIONS Release of Program Restrictions 345,305 (345,305) - - Release of Capital Expenditure Restrictions 2,465,000 (2,465,000) - - Total Released from Restrictions 2,810,305 (2,810,305) - - Total Public Support, Revenue and Investment Returns 69,020,059 2,362,991-71,383,050 EXPENSES Program Services 52,310,826 - - 52,310,826 General and Administrative 4,017,625 - - 4,017,625 Fundraising 1,070,671 - - 1,070,671 Total Expenses 57,399,122 - - 57,399,122 CHANGE IN NET ASSETS 11,620,937 2,362,991-13,983,928 Net Assets - Beginning of Year 97,642,222 27,500 948,867 98,618,589 NET ASSETS - END OF YEAR $ 109,263,159 $ 2,390,491 $ 948,867 $ 112,602,517 See accompanying Notes to Combined Financial Statements. (4)
2015 Temporarily Permanently Unrestricted Restricted Restricted Total $ 1,024,102 $ 456,619 $ - $ 1,480,721-2,060,033-2,060,033 43,200 - - 43,200 264,289 - - 264,289 1,331,591 2,516,652-3,848,243 37,171,151 - - 37,171,151 468,980 - - 468,980 476,364 - - 476,364 264,392 - - 264,392 2,602,850 43,668-2,646,518 445,318 7,472-452,790 (1,002,326) (13,990) - (1,016,316) 171,640 - - 171,640 310,171 - - 310,171 40,908,540 37,150-40,945,690 711,777 (711,777) - - 1,875,000 (1,875,000) - - 2,586,777 (2,586,777) - - 44,826,908 (32,975) - 44,793,933 46,093,836 - - 46,093,836 3,503,800 - - 3,503,800 1,207,860 - - 1,207,860 50,805,496 - - 50,805,496 (5,978,588) (32,975) - (6,011,563) 103,620,810 60,475 948,867 104,630,152 $ 97,642,222 $ 27,500 $ 948,867 $ 98,618,589. (5)
COMBINED STATEMENTS OF CASH FLOWS YEARS ENDED 2016 2015 CASH FLOWS FROM OPERATING ACTIVITIES Changes in Net Assets $ 13,983,928 $ (6,011,563) Adjustments to Reconcile Change in Net Assets to Net Cash Used by Operating Activities: Net Realized and Unrealized (Gain) Loss on Investments (1,259,809) 1,016,316 Realized Loss (Gain) on Sale of Property and Equipment (10,322,481) (172,645) Noncash Change in Value of Beneficial Interest in Trust Assets (93,021) 513,226 Bad Debt Expense 178,050 110,734 Depreciation Expense 1,157,200 903,412 Amortization Expense 22,993 12,460 Depletion Expense 494,680 - In-Kind Contributions of Property and Equipment - (361,925) (Increase) Decrease in Operating Assets: Grants and Program Receivable (2,420,823) (2,515,695) Other Receivables (56,781) 206,510 Prepaid Expenses 36,203 95,500 Promises to Give (469,628) (786,421) Increase (Decrease) in Operating Liabilities: Accounts Payable and Accrued Liabilities 40,525 1,746,580 Contributions Restricted for Long-Term Purposes (4,735,000) (2,060,033) Net Cash Used by Operating Activities (3,443,964) (7,303,544) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of Property and Equipment (3,355,007) (5,401,659) Proceeds from Sale of Property 12,133,598 60,294 Proceeds from Sale of Investments 8,768,098 12,914,906 Purchase of Investments (8,180,298) (11,601,805) Change in Cash Restricted for Property and Equipment (1,150,000) - Net Cash Provided (Used) by Investing Activities 8,216,391 (4,028,264) CASH FLOWS FROM FINANCING ACTIVITIES Net (Payments) Draws on Line of Credit (9,450,658) 9,947,180 Decrease in Restricted Cash 89,468 79,168 Proceeds from Contributions Restricted for: Investment in Property and Equipment 4,735,000 2,040,033 Net Cash (Used) Provided by Financing Activities (4,626,190) 12,066,381 NET INCREASE IN CASH AND CASH EQUIVALENTS 146,237 734,573 Cash and Cash Equivalents - Beginning of Year 2,056,209 1,321,636 CASH AND CASH EQUIVALENTS - END OF YEAR $ 2,202,446 $ 2,056,209 SUPPLEMENTAL CASH FLOW INFORMATION Interest Paid $ 271,455 $ 268,823 See accompanying Notes to Combined Financial Statements. (6)
COMBINED STATEMENTS OF FUNCTIONAL EXPENSES YEARS ENDED 2016 General Program and Services Administrative Fundraising Total ACH Child and Family Services Salaries and Wages $ 7,909,194 $ 1,393,448 $ 457,582 $ 9,760,224 Payroll Taxes and Employee Benefits 1,812,750 606,385 69,231 2,488,366 Total Personnel Expense 9,721,944 1,999,833 526,813 12,248,590 Occupancy and Maintenance 992,677 297,365 14,721 1,304,763 Vehicles 137,248 27,510 9 164,767 Insurance and Taxes 118,595 36,841 3,383 158,819 Food, Clothing and Supplies 360,069 98,035 11,999 470,103 Medical 14,559 - - 14,559 Youth Activities 38,816 4 2,783 41,603 Education 3,533-130 3,663 Family Assistance 20,390 66-20,456 Foster Care Expenses 1,778,598 - - 1,778,598 Other Program and Training Expense 365,667-175,830 541,497 Development and Promotion 11,104-10,651 21,755 Outreach and Awareness 157,479 135,087 120,982 413,548 Contract Services 440,806 469,097 28,885 938,788 Audit and Legal Services 1,635 117,188 168 118,991 Staff Development and Travel 345,402 126,144 11,463 483,009 Board Development 23 11,363-11,386 Miscellaneous Expenses 181,297 20,336 3,050 204,683 Capital Project Expenses 126,534 44,500 157,088 328,122 Interest Expense - 99,342-99,342 OCOK Provider Payments 36,664,409 - - 36,664,409 Total Expenses Before Depreciation and Pass Through 51,480,785 3,482,711 1,067,955 56,031,451 Depreciation and Amortization 416,529 30,785 2,716 450,030 Total Expenses - ACH 51,897,314 3,513,496 1,070,671 56,481,481 All Church Home for Children Foundation Legal and Professional Services - 5,365-5,365 Total Expenses - Foundation - 5,365-5,365 ACH Landowner Legal and Professional Services - 10,000-10,000 Interest Expense - 172,113-172,113 Depreciation and Amortization 413,512 316,651-730,163 Total Expenses - ACH Landowner 413,512 498,764-912,276 Total Expenses - Combined $ 52,310,826 $ 4,017,625 $ 1,070,671 $ 57,399,122 See accompanying Notes to Combined Financial Statements. (7)
2015 General Program and Fund Services Administrative Raising Total $ 7,301,450 $ 1,278,203 $ 568,886 $ 9,148,539 1,811,442 362,292 140,011 2,313,745 9,112,892 1,640,495 708,897 11,462,284 905,129 282,278 22,755 1,210,162 75,817 42,653 1,570 120,040 130,165 52,088 3,562 185,815 433,878 129,344 11,051 574,273 12,849 19-12,868 41,655 919 4,171 46,745 4,281-820 5,101 15,790 708-16,498 1,765,582 - - 1,765,582 392,342 2,899-395,241 9,749 302 12,625 22,676 78,330 132,287 122,959 333,576 709,340 455,297 67,236 1,231,873 2,105 123,467-125,572 306,663 152,796 9,141 468,600-15,880-15,880 246,381 16,487 2,654 265,522 260,772 42,067 238,332 541,171-97,179-97,179 30,798,248 - - 30,798,248 45,301,968 3,187,165 1,205,773 49,694,906 266,713 14,253 2,087 283,053 45,568,681 3,201,418 1,207,860 49,977,959-8,074-8,074-8,074-8,074-15,000-15,000-171,644-171,644 525,155 107,664-632,819 525,155 294,308-819,463 $ 46,093,836 $ 3,503,800 $ 1,207,860 $ 50,805,496 (8)
NOTE 1 ORGANIZATION AND OPERATIONS ACH Child and Family Services (ACH) was established in 1915 by the Women s Federation of Churches to receive and manage donations of cash and property, and to distribute resources exclusively for the purpose of caring for dependent and neglected children. ACH is a Texas nonprofit corporation dedicated to the prevention, intervention, and treatment of child abuse, neglect, and family separation. The All Church Home for Children Foundation is a Texas nonprofit corporation, organized to hold, manage, solicit, receive, administer, and invest assets for the exclusive use, benefit, and support of ACH Child and Family Services (ACH) in a manner that is responsive to the needs and demands of ACH. ACH Landowner is a Texas nonprofit corporation, organized to support its sole member, ACH Child and Family Services (ACH) by providing financial and other resources to assist ACH in achieving the fulfillment of its mission. Specifically, ACH Landowner will hold, develop, and lease certain real property to ACH to be used for administration and programs. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of ACH is presented to assist in understanding ACH s combined financial statements. The combined financial statements and notes are representations of ACH s management who are responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America (U.S. GAAP) and have been consistently applied in the preparation of the combined financial statements. Combined Financial Statements The accompanying combined financial statements include the accounts of ACH Child and Family Services, All Church Home for Children Foundation and ACH Landowner (collectively, ACH), since they are financially interrelated organizations. Significant intercompany transactions and balances have been eliminated in the combination. Financial Statement Presentation ACH presents the combined financial statements in accordance with U.S. GAAP. As such, ACH is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. The fund groups are reported in the three classes of net assets as follows: Unrestricted Net Assets These funds have no external restrictions and can be used for any purpose designated by the Board. (9)
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Financial Statement Presentation (Continued) Temporarily Restricted Net Assets These funds generally represent funds for which the donor has limited the use of the funds by stipulating how or when the funds are to be used. The restrictions are satisfied either by passage of time or by actions of ACH. Permanently Restricted Net Assets These are funds that have been restricted by the donor and cannot be satisfied by the passage of time or by actions of ACH. Use of Estimates The preparation of combined financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the combined financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents ACH considers only cash in banks and cash on hand as cash and cash equivalents. These cash equivalents are financial instruments that potentially subject ACH to concentrations of credit risk. ACH places its cash with high credit-quality financial institutions and periodically maintains deposits in amounts that exceed FDIC insurance coverage. Management believes the risk of incurring material losses related to this credit risk is remote. Grants, Program Service Fees, and Accounts Receivable ACH s receivables consist principally of program service fees and grants from governmental agencies. ACH utilizes the allowance method for recognition of bad debts. Based on management s assessment of the credit history of grantors, an allowance for doubtful accounts of $160,212 and $100,000 was deemed necessary as of December 31, 2016 and 2015, respectively. Bad debt expense was $178,050 and $110,734 for the years ended December 31, 2016 and 2015, respectively. Contributions Received and Promises to Give Contributions are recognized when unconditional commitments are received and recorded as unrestricted, temporarily restricted, or permanently restricted support, depending on the existence and/or nature of any donor restrictions. Unconditional commitments which have been promised, but not yet received, are recorded as promises to give in the combined statement of financial position. When a donor restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the combined statement of activities as net assets released from restrictions. (10)
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Property and Equipment Expenditures for property and equipment in excess of $2,500 and having a useful life of one year or more are capitalized and recorded on ACH s books at cost. Donations of significant property and equipment are recorded as support at their estimated fair value. Such donations are reported as unrestricted support unless the donor has restricted the donated asset to a specific purpose. Assets donated with explicit restrictions regarding their use and contributions of cash that must be used to acquire property and equipment are reported as restricted support. Absent donor stipulations regarding how long those donated assets must be maintained, ACH reports expirations of donor restrictions when the donated or acquired assets are placed in service as instructed by the donor. ACH reclassifies temporarily restricted net assets to unrestricted net assets at that time. Maintenance, repairs, and minor renewals are expensed as incurred. When assets are retired or otherwise disposed of, their cost and related accumulated depreciation are removed from the accounts. Resulting gains or losses are included in income. Depreciation of property and equipment is computed on the straight-line basis over their estimated useful lives. The estimated useful lives range from five to thirty years. Depreciation expense for 2016 and 2015 amounted to $1,157,200 and $903,412, respectively. Impairment of Long-Lived Assets Management evaluates its long-lived assets for financial impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. An impairment loss is recognized when the estimated undiscounted future cash flows from the assets are less than the carrying value of the assets. Assets to be disposed of are reported at the lower of their carrying amount or fair value, less cost to sell. Management is of the opinion that the carrying amount of its long-lived assets does not exceed their estimated recoverable amount. Income Taxes ACH is organized as a nonprofit corporation under Section 501(c)(3) of the Internal Revenue Code. This section exempts ACH from taxes on income. Accordingly, no provision for income taxes has been made in the combined financial statements. The Internal Revenue Service had previously classified ACH as a private foundation; however, ACH was approved for public charity status beginning in year 2011. The All Church Home for Children Foundation and ACH Landowner are classified as public charities. Taxes are paid on net income earned from sources unrelated to the exempt purposes. Net income(loss) from unrelated business for the years ended December 31, 2016 and 2015 was estimated at approximately ($17,000) and $50,000, respectively. Unrelated business income taxes of $7,000 are accrued in the financials and included in functional expenses under Insurance and Taxes. Tax returns are open for audit by these authorities for three years from the due date of the return of the date actually filed. (11)
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Concentration of Credit Risk Financial instruments which potentially subject ACH to concentrations of credit risk consist primarily of receivables from program services and amounts deposited in banks in excess of the Federal Deposit Insurance Corporation s insured limit. Approximately 97% and 95% of total program receivables is due from one government agency as of December 31, 2016 and 2015. Two donor commitments comprised 90% and 80% of the total balance of promises to give as of December 31, 2016 and 2015. ACH currently invests in a variety of fixed income, equities, open and closed-end mutual funds and investment holding companies. Management believes diversity within the portfolio avoids significant concentration of credit risk with respect to these investments. Investments and Fair Value ACH follows FASB ASC No. 958-320. Under this section, investments in marketable securities with readily determinable fair values and all investments in debt securities are valued at their fair values in the combined statement of financial position. Investments in nonpublicly traded investment entities are recorded at fair value based on independent audits of these investment entities and their underlying investment securities. Investment income includes interest and dividends, net of investment expenses and is included in the combined statement of activities as increases in unrestricted net assets, unless the donor or law restricts the income or loss. Unrealized gains and losses are included in the change in net assets. FASB ASC No. 820-10, Fair Value Measurements, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels: Level 1 inputs consist of unadjusted quoted prices in active markets for identical assets and have the highest priority, Level 2 inputs consist of other observable inputs (including quoted prices for similar securities, interest rates, prepayment spreads, credit risk, etc.) and Level 3 inputs have the lowest priority. ACH uses appropriate valuation techniques based on the available inputs to measure the fair value of its investments. When available, ACH measures fair value using Level 1 inputs because they generally provide the most reliable evidence of fair value. Level 2 inputs are obtained on debt securities held which are not traded on a daily basis, and Level 3 inputs are used in determining the value of the investment partnership/hedge funds and the mineral interests and real estate owned by ACH that are not actively traded and significant other observable inputs are not available. Thus, the fair value of the mineral interests and real estate is equal to the lower of cost or estimated fair value of accumulated cost recovery. Investments in partnerships/hedge funds are carried at the audited net asset value of the investment. (12)
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Mineral Interests and Real Estate ACH s investments in real estate and mineral interests were acquired primarily by contribution and recorded at the estimated fair market value (cost) at the date of receipt. Market value is calculated by discounting future cash flows from estimated production and expected future market prices for the related minerals. These investments are carried at the lower of amortized cost or market value. Accordingly, the mineral interests have been amortized using an annual basis of 15% of the gross income generated by the interests. Deferred Financing Costs Deferred financing costs represent costs incurred in connection with the issuance of longterm debt. Such costs are being amortized over the term of the respective debt using the straight-line method, a method which approximates the effective interest rate method. At December 31, 2016 and 2015, deferred financing costs were $99,684. At December 31, 2016 and 2015, accumulated amortization of deferred financing costs was $92,564 and $69,571, respectively. Amortization expense related to the deferred financing costs was $22,993 and, $12,460 respectively. Donated Goods and Services From time to time, ACH will receive donated goods, property, or other assets. These assets are recorded in the combined statement of financial position at their estimated fair value at the time of the gift. Revenue from such gifts is recognized as contributions in the combined statement of activities for the value of the asset. Gifts of property and equipment received during the years ended December 31, 2016 and 2015 totaled -$0- and $361,925, respectively. No amounts have been reflected in the combined financial statements for donated services since the services did not meet the criteria for recognition. However, a number of volunteers donate significant amounts of their time to ACH. Functional Allocation of Expenses The costs of providing program, fund-raising and supporting services have been summarized on a functional basis in the combined statement of functional expenses. Accordingly, certain costs have been allocated among the programs and fundraising activities benefited. Reclassifications Certain reclassifications have been made to the December 31, 2015 combining financial statements in order to present them in conformity with the December 31, 2016 combining financial statements. These reclassifications have no effect on net assets as previously reported. (13)
NOTE 3 NEW ACCOUNTING PRONOUNCEMENTS The Organization has adopted the accounting guidance in the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2015-03, Interest Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires organizations to present debt issuance costs as a direct deduction from the face amount of the related borrowings, amortize debt issuance costs using the effective interest method over the life of the debt, and record the amortization as a component of interest expense. The effect of adopting the new standard decreased the debt issuance costs asset to zero and decreased the debt liability by $30,113 as of January 1, 2016. The adoption of the standard has no effect on previously reported net assets. The ASU is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. The ASU is retrospectively applied. NOTE 4 RESTRICTED CASH Restricted cash consists of funds held in trust by the Bank of America/U.S. Trust for ACH to use for construction and improvements to certain real property to be used in future operations. The cash balance of $215,082 and $304,550 as of December 31, 2016 and 2015, respectively, is held by Bank of America/U.S. Trust in accordance with certain debt instruments reflected in Note 11 to the combined financial statements. Cash Restricted for Capital Improvements consists of cash to be used for renovation of the dining hall and basketball court. Of the capital campaign contributions in temporarily restricted net assets, $1,100,000 represents promises to give, and $1,170,000 represents restricted cash. NOTE 5 PROMISES TO GIVE ACH recognizes unconditional promises to give as support in the period the promise to give is made and reports them as contributions in the statement of activities. Contributions that are expected to be collected in future years are recorded at the present value of the amount expected to be collected. The discount rate has been imputed at 2.0% which approximates the Organization s risk free borrowing rate at December 31, 2016 and 2015. At December 31, 2016 and 2015, all promises to give are considered fully collectible and no allowance for doubtful accounts has been estimated. Promises to give consist of the following at December 31, 2016 and 2015: 2016 2015 Promises to Give $ 1,384,286 $ 812,336 Present Value Discount (102,322) - Promises to Give, Net $ 1,281,964 $ 812,336 (14)
NOTE 5 PROMISES TO GIVE (CONTINUED) At December 31, 2016, promises to give are expected to be received as follows: Year Ending December 31, Amount 2017 $ 477,286 2018 100,000 2019 107,000 2020 100,000 2021 100,000 Thereafter 500,000 Total $ 1,384,286 NOTE 6 INVESTMENTS Publicly Traded/Listed Securities Investments in publicly traded debt and equity securities as well as open and closed-end listed mutual funds are carried at fair market value and are comprised of the following as of: December 31, 2016 Cumulative Unrealized Fair Appreciation Investment Description Market Value Cost (Depreciation) Short-Term Investment Funds $ 1,754,846 $ 1,754,846 $ - Fixed Income Mutual Funds-Domestic 7,527,174 7,827,506 (300,332) Equity Mutual Funds-Domestic 6,767,183 5,312,532 1,454,651 Equity Mutual Funds-International 12,416,290 12,695,470 (279,180) Stocks-Domestic 7,265,710 6,664,468 601,242 Total Publicly Traded/Listed Securities $ 35,731,203 $ 34,254,822 $ 1,476,381 December 31, 2015 Cumulative Unrealized Fair Appreciation Investment Description Market Value Cost (Depreciation) Short-Term Investment Funds $ 1,873,976 $ 1,873,976 $ - Fixed Income Mutual Funds-Domestic 6,174,316 6,494,899 (320,583) Fixed Income Mutual funds-international 1,487,025 1,762,888 (275,863) Equity Mutual Funds-Domestic 6,068,263 4,997,318 1,070,945 Equity Mutual Funds-International 11,330,741 12,038,280 (707,539) Stocks-Domestic 8,243,571 7,350,352 893,219 Total Publicly Traded/Listed Securities $ 35,177,892 $ 34,517,713 $ 660,179 (15)
NOTE 6 INVESTMENTS (CONTINUED) Nonpublicly Traded Securities Investments in nonpublicly traded investment holding company entities are carried at fair value which is based on an independent audit of the entities and their underlying investment securities. Following are these nonpublicly traded investments as of: December 31, 2016 Cumulative Unrealized Fair Appreciation Hedge Fund Description Value Cost (Depreciation) Blackstone Tactical Opportunities Fund (d) $ 1,597,885 $ 1,752,406 $ (154,521) Golden Tree Offshore Fund, Ltd. (b) 2,429,814 1,654,738 775,076 Pointer Offshore Ltd. (c) 2,042,286 1,050,000 992,286 Skybridge Multi-Advisor Hedge Fund (a) 1,797,345 2,071,286 (273,941) The Weatherflow Offshore Fund (a) 2,274,776 1,809,142 465,634 Third Point Offshore Fund (e) 2,528,447 1,528,515 999,932 Canyon Value Realization Fund (g) 1,243,424 1,175,000 68,424 HPC Millennium Int'l Ltd. (f) 1,630,865 1,500,000 130,865 Total Nonpublicly Traded Securities $ 15,544,842 $ 12,541,087 $ 3,003,755 December 31, 2015 Cumulative Unrealized Fair Appreciation Hedge Fund Description Value Cost (Depreciation) BA Cayman Fund Ltd. (a) $ 179,392 $ - $ 179,392 Blackstone Tactical Opportunities Fund (d) 1,685,164 1,669,706 15,458 Golden Tree Offshore Fund, Ltd. (b) 2,250,772 1,654,738 596,034 Pointer Offshore Ltd. (c) 3,593,091 2,500,000 1,093,091 Skybridge Multi-Advisor Hedge Fund (a) 3,304,479 3,161,005 143,474 The Weatherflow Offshore Fund (a) 2,252,606 1,809,142 443,464 Third Point Offshore Fund (e) 2,383,351 1,528,515 854,836 Canyon Value Realization Fund (g) 1,142,723 1,175,000 (32,277) HPC Millennium Int'l Ltd. (f) 1,584,566 1,500,000 84,566 Total Nonpublicly Traded Securities $ 18,376,144 $ 14,998,106 $ 3,378,038 (a) These funds have no lock-up restrictions, nor any liquidity restrictions greater than 65 days, if any. (b) It has a 12-month initial lockup (purchased during 2012) and quarterly liquidity with a 90 day notice. (c) It has a 24-month initial lockup (purchased during 2012) and annual liquidity with notice by September 15 th. (d) It has a 36-month initial lockup (purchased during 2013). Unfunded capital commitments totaled $355,989. (e) The lock up restriction has expired and quarterly liquidity with a 65 day notice. (f) Quarterly withdrawals with 95 day notice. Withdrawals are limited to 25% of partners capital. (g) Quarterly withdrawals with notice being required to be given by the 20 th calendar day of the first month of the applicable fiscal quarter. Withdrawals are limited to 25% of partners capital. (16)
NOTE 6 INVESTMENTS (CONTINUED) Fair Value Hierarchy Measurements The above investments were classified as follows at December 31: 2016 Level 1 Level 2 Level 3 Total Short-Term Investment Funds $ 1,754,846 $ - $ - $ 1,754,846 Fixed Income Mutual Funds-Domestic 7,527,174 - - 7,527,174 Equity Mutual Funds-Domestic 6,767,183 - - 6,767,183 Equity Mutual Funds-International 12,416,290 - - 12,416,290 Stocks-Domestic 7,265,710 - - 7,265,710 Nonpublicly Traded Hedge Funds - - 15,544,842 15,544,842 Totals $ 35,731,203 $ - $ 15,544,842 $ 51,276,045 Level 1 Level 2 Level 3 Total Short-Term Investment Funds $ 1,873,976 $ - $ - $ 1,873,976 Fixed Income Mutual Funds-Domestic 6,174,316 - - 6,174,316 Fixed Income Mutual Funds-International 1,487,025 - - 1,487,025 Equity Mutual Funds-Domestic 6,068,263 - - 6,068,263 Equity Mutual Funds-International 11,330,741 - - 11,330,741 Stocks-Domestic 8,243,571 - - 8,243,571 Nonpublicly Traded Hedge Funds - - 18,376,144 18,376,144 Totals $ 35,177,892 $ - $ 18,376,144 $ 53,554,036 2015 Transfers between Levels 1 and 2 generally related to whether a market becomes active or inactive. Transfers between Level 2 and 3 generally relate to a change in the liquidity restrictions of the private investment companies. The Partnerships in which ACH invests generally use the capital balance or net asset value of underlying funds as a primary significant unobservable input in their valuations; however, adjustments to the reported capital balance may be made on various factors, including, but not limited to, the attributes of the interest held, including the rights and obligations, any restrictions or illiquidity of such interest, any potential callbacks by the Investment Partnership, changes in the investment funds' lock-up periods, and the fair value of the underlying investment portfolio or other assets and liabilities. A reconciliation of the change in the fair values of Level 3 investments is as follows: Changes in Level 3 Fair Values Beginning Balance, December 31, 2015 $ 18,376,144 Realized Gains and Losses 63,855 Unrealized Gains and Losses 380,092 Capital Contributions 120,408 Distributions of Capital and Reinvested Earnings (3,373,758) Other Income and Loss, Net of Fees (21,899) Ending Balance, December 31, 2016 $ 15,544,842 (17)
NOTE 6 INVESTMENTS (CONTINUED) A reconciliation of the change in the fair values of Level 3 investments is as follows: Changes in Level 3 Fair Values Beginning Balance, December 31, 2014 $ 17,687,182 Realized Gains and Losses (9,463) Unrealized Gains and Losses (608,560) Purchases 2,502,226 Capital Contributions 328,992 Sales (1,123,959) Distributions of Capital and Reinvested Earnings (381,049) Other Income and Loss, Net of Fees (19,225) Ending Balance, December 31, 2015 $ 18,376,144 Mineral Interests and Real Estate Investments in mineral interests and real estate are carried at the lower of cost or estimated fair value. The balance reflected on the combined statement of financial condition of $22,387,326 and $22,882,006 represents amortized cost since historical cost is considered a stronger indicator of fair value due to availability of fair value information and discrepancies in bank trustee calculations due to the timing of transfers of mineral rights between bank trustees. During the years ended December 31, 2016 and 2015, there were no purchases of mineral interests or real estate. Investment Returns The following schedules summarize the investment returns, on all investments, for the years ended December 31: 2016 2015 Mineral Income $ 4,302,331 $ 2,757,748 Real Estate Income 8,082 40,087 Less: Depletion (494,680) - Less: Mineral Expense (334,844) (144,295) Less: Real Estate Expense (8,567) (7,022) Net Mineral and Real Estate Income $ 3,472,322 $ 2,646,518 Dividends and Interest $ 995,756 $ 826,613 Less: Investment Advisory and Bank Fees (427,067) (373,823) Net Investment Income $ 568,689 $ 452,790 Net Realized Gains (Losses) on Investment Securities $ 814,524 $ (1,232,096) Net Realized Gains on Sale of Other Assets Held for Investment - 171,640 Net Unrealized Gains on Investment Securities 445,285 215,767 Net Realized and Unrealized Gains (Losses) on Investments $ 1,259,809 $ (844,689) (18)
NOTE 7 BENEFICIAL INTEREST IN TRUST ACH has a beneficial interest in the trust. ACH s share of the net assets of the Trust is reflected at estimated fair value. The composition of ACH s share of the net assets of the Trust as of December 31, 2016 and 2015 is as follows: December 31, 2016 Level 1 Level 2 Level 3 Total Short-Term Investment Funds $ 315,485 $ - $ - $ 315,485 Equities 6,329,502 - - 6,329,502 Fixed Income Securities - 1,291,502-1,291,502 Hedge Funds - - 925,889 925,889 Real Estate - - 569,955 569,955 Commodities - - 296,762 296,762 Totals $ 6,644,987 $ 1,291,502 $ 1,792,606 $ 9,729,095 December 31, 2015 Level 1 Level 2 Level 3 Total Short-Term Investment Funds $ 530,906 $ - $ - $ 530,906 Fixed Income Securities - 877,310-877,310 Equity Securities 6,277,227-1,095,389 7,372,616 Real Estate and Mineral Interests - - 855,242 855,242 Totals $ 6,808,133 $ 877,310 $ 1,950,631 $ 9,636,074 A reconciliation of the change in the fair values of Level 3 investments is as follows: Changes in Level 3 Fair Values Beginning Balance, December 31, 2015 $ 1,950,631 Unrealized Gains and Losses (82,827) Sales and Distributions of Capital and Reinvested Earnings (75,198) Ending Balance, December 31, 2016 $ 1,792,606 ACH received cash distributions of $408,128 and $806,215 and recognized an unrealized increase in the value of the trust of $501,149 and $310,171 during the years ended December 31, 2016 and 2015 resulting in a net increase (decrease) in value of beneficial interest in trust assets of $93,021 and $(496,044). During the final quarter of 2014, the trust elected to distribute all of its underlying mineral rights to its two beneficiaries. Accordingly, ACH received its proportion of the minerals holdings and related income streams directly from the Trust into its own custodianship during 2015 after applicable transfers of title and changes in purchasers of record were completed. Such minerals were recorded at their fair value as of the date of transfer of $21,222,881, and are presented in the Combined Statement of Financial Position in Mineral Interests and Real Estate. (19)
NOTE 8 NOTE RECEIVABLE At December 31, 2016, ACH has a note receivable from BOA Investment Fund III, LLC in the amount of $9,070,750 with interest payable annually at 1%. Principal and interest payments of the note are to commence in June 2018 with final payment due June 2047. The note is unsecured. This note receivable originated with the issuance of certain debt instruments reflected in Note 11 to the combined financial statements. However, there is not a right of offset with these debt instruments. NOTE 9 PROPERTY AND EQUIPMENT Property and equipment is comprised of the following as of December 31: 2016 2015 Land $ 2,279,597 $ 3,573,594 Buildings and Improvements 27,173,012 26,483,851 Furniture, Fixtures and Equipment 1,297,843 2,146,631 Automobiles 557,053 595,931 Construction in Progress 724,010 205,466 Total Property and Equipment 32,031,515 33,005,473 Less: Accumulated Depreciation (6,886,591) (8,247,239) Net Property and Equipment $ 25,144,924 $ 24,758,234 NOTE 10 LINE OF CREDIT ACH maintains a line of credit with a financial institution which has a maximum amount of $17,000,000 and an open-ended maturity. Interest is payable monthly at the LIBOR rate plus 1.25%. The line of credit is currently secured by ten of ACH s sub-investment accounts with a fair value at December 31, 2016 of $19,222,116 (the financial institution calculates a borrowing base of 70% to 100% on this amount based upon the type of underlying investments). There was $2,450,124 and $11,900,782 outstanding on the line of credit as of December 31, 2016 and 2015, respectively. (20)
NOTE 11 NOTES PAYABLE ACH, specifically ACH Landowner, was obligated on the following notes payable as of December 31: Payable to and Terms: 2016 2015 Bank of America CDE III, interest accrued monthly, paid annually, at 1.00% until June 4, 2018, then principal and interest is due annually until maturity at June 4, 2047. $ 9,070,750 $ 9,070,750 Bank of America CDE III, interest accrued monthly, paid annually, at 2.00% until June 1, 2018, then principal and interest is due annually until maturity at 3,929,250 3,929,250 June 4, 2047. Total Notes Payable $ 13,000,000 $ 13,000,000 The notes payable are due in the following installments as of December 31, 2016: Due in Year Ending 2017 $ - 2018 373,725 2019 377,463 2020 381,237 2021 385,050 Thereafter 11,482,525 Total Notes Payable $ 13,000,000 All of the above notes are secured by the deed of trust on the Wichita property. The above notes payable may be paid off early in the year 2017 at a discount of $3,889,957 to the principal balance above. See NOTE 15 on subsequent events. NOTE 12 TEMPORARILY RESTRICTED NET ASSETS Temporarily restricted net assets were restricted for the following purposes as of December 31, 2016 and 2015: 2016 2015 Capital Campaign - Basketball Court $ 20,000 $ 20,000 Capital Campaign - Dining Hall 2,250,000 - Morris Home 100,000 - Wellness Program 20,000 - School Supplies 491 - LIFE Program - 7,500 $ 2,390,491 $ 27,500 (21)
NOTE 13 PERMANENTLY RESTRICTED NET ASSETS AND ENDOWMENT FUNDS The Board of Directors of ACH has interpreted the State Prudent Management of Institutional Funds Act (SPMIFA) as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, ACH classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument as the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by ACH in a manner consistent with the standard of prudence prescribed by SPMIFA. In accordance with SPMIFA, ACH considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: 1) The duration and preservation of the fund. 2) The purposes of ACH and the donor-restricted endowment fund. 3) General economic conditions. 4) The possible effect of inflation and deflation 5) The expected total return from income and the appreciation of investments. 6) Other resources of ACH. 7) The investment policies of ACH. Permanently restricted net assets are restricted to investments in perpetuity. Board-Designated Endowments The Board of Directors had designated $76,110,297 and $54,649,097 at December 31, 2016 and 2015, respectively, of unrestricted net assets as a general endowment to support the mission of ACH. Since that amount resulted from an internal designation and is not donor-restricted, it is classified and reported as unrestricted net assets. Donor-Designated Endowments ACH s permanent endowment consists of three funds totaling $948,867 established to assist in funding residential activities. Return Objectives and Risk Parameters ACH has a spending policy of appropriating for distribution each year 5% of the rolling average of the previous three audited calendar years investment corpus. In establishing this policy, ACH considered the long-term expected investment return on its endowment. Accordingly, over the long-term, ACH expects the current spending policy to allow its general endowment fund to grow at an average of 4% annually. This is consistent with ACH s objective to maintain the purchasing power of the endowment assets as well as to provide additional real growth through investment return. (22)
NOTE 13 PERMANENTLY RESTRICTED NET ASSETS AND ENDOWMENT FUNDS (CONTINUED) Strategies Employed for Achieving Objectives To achieve that objective, ACH has adopted an investment policy that attempts to maximize total return consistent with an acceptable level of risk. Endowment assets are invested in a well-diversified asset mix, which includes equity and debt securities, that is intended to result in a consistent inflation-protected rate of return that has sufficient liquidity to make an annual distribution of 5%, while growing the fund if possible. Accordingly, ACH expects its endowment assets, over time, to produce an average rate of return of approximately 9% annually. Actual returns in any given year may vary from this amount. Investment risk is measured in terms of the total endowment fund; investment assets and allocation between asset classes and strategies are managed to not expose the fund to unacceptable levels of risk. Composition of and changes in endowment net assets for the years ended December 31 were as follows: 2016 Board Donor Designated Designated Total Endowment Net Assets - Beginning of Year $ 54,649,097 $ 948,867 $ 55,597,964 Investment from ACH Designated by Board to Endowment 21,222,881-21,222,881 Investment Income, Net of Fees 558,983 9,706 568,689 Mineral and Real Estate Properties, Net of Expenses 3,413,061 59,261 3,472,322 Net Realized and Unrealized Gains on Investments 1,238,308 21,501 1,259,809 Legal Expenses on Real Estate (5,273) (92) (5,365) Amounts Transferred for Expenditure (4,966,760) (90,376) (5,057,136) Endowment Net Assets, End of Year $ 76,110,297 $ 948,867 $ 77,059,164 2015 Board Donor Designated Designated Total Endowment Net Assets - Beginning of Year $ 56,610,312 $ 948,867 $ 57,559,179 Investment Income, Net of Fees 445,318 7,472 452,790 Mineral and Real Estate Properties, Net of Expenses 2,602,850 43,668 2,646,518 Net Realized and Unrealized Losses on Investments (830,699) (13,990) (844,689) Legal Expenses on Real Estate (7,941) (133) (8,074) Amounts Transferred for Expenditure (4,170,743) (37,017) (4,207,760) Endowment Net Assets, End of Year $ 54,649,097 $ 948,867 $ 55,597,964 (23)
NOTE 14 EMPLOYEE BENEFIT PLAN ACH sponsors a 401(k) plan for all qualified employees. ACH matches employee contributions at a rate of $1.00 for each employee dollar up to 3% of the employee s salary and then an additional $0.50 for each employee dollar up to an additional 2% of the employee s salary. Employer contributions to the Plan amounted to $182,975 and $154,254 during the years ended December 31, 2016 and 2015, respectively. NOTE 15 SUBSEQUENT EVENTS In March 2017, ACH signed a contract for the renovation of its dining hall. The maximum price of the contract was $3,990,145, with renovations expected to be completed in November 2017. On June 5, 2017, ACH exercised its option for early repayment of certain notes payable and unwound its New Market Tax Credit arrangement with Bank of America CDE III, LLC and BOA Investment Fund, LLC. In settlement of this arrangement notes payable in the amount of $13,000,000 were redeemed with a cash payment of $124,146 (of which $39,293 represented principal and the remainder represented interest and fees), settlement of a note receivable held by ACH Child and Family Services of $9,070,750, and forgiveness of the remaining $3,889,957 in accordance with the terms of the original agreement. During June 2017, ACH formed a new entity, Landowner II, and closed on a new agreement to form a New Market Tax Credit arrangement with several investors. As part of this arrangement, the consolidated entity received approximately $14,200,000 in new funding, and funded a note receivable in the amount of $9,771,940 as part of its equity investment in the arrangement. The agreement allows for forgiveness of approximately $4,818,060 at the unwinding of the arrangement. ACH has evaluated subsequent events through September 21, 2017, which is the date that combined financial statements were available to be issued. (24)
CliftonLarsonAllen LLP CLAconnect.com INDEPENDENT AUDITORS' REPORT ON COMBINING INFORMATION The Board of Directors ACH Child and Family Services and Affiliates Fort Worth, Texas We have audited the combined financial statements of ACH Child and Family Services and Affiliates (ACH) as of and for the year ended December 31, 2016 and have issued our report thereon date September 21, 2017, which contained an unmodified opinion on those combined financial statements. Our audit was performed for the purpose of forming an opinion on the combined financial statements as a whole. The combining statement of financial position and combining statement of activities are presented for the purpose of additional analysis and are not a required part of the combined financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the combined financial statements. The information has been subjected to the auditing procedures applied in the audit of the combined financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the combined financial statements or to the combined financial statements themselves, and additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the combined financial statements as a whole. CliftonLarsonAllen LLP Fort Worth, Texas September 21, 2017 (25)